An email correspondent said this to me recently:
MMT puts the horse before the cart; but I suspect if you designed the harness well, horses COULD push carts, so do they in fact amount to the same thing: create-spend-tax versus tax-borrow-spend? Aren't you bound by the need to tax to preserve spending power, as well as by resources?
Has there been an economy which did the former, created money, spent it, and levied tax and managed to set the tax regime just right? I don't know. How did the early Soviet Union manage, Gosplan and all that? How about China?
I was amused by the question, but what it really amounts to is whether it makes a great deal of difference if tax precedes spending, as neoclassical and neoliberal economics would imply, or if spending precedes tax, as Modern Monetary Theory — or modern money, as I currently prefer to call it — suggests is the case.
Let me start by saying that in some ways, I am surprised the question is asked. It is akin to asking whether it matters if we drive on the left or the right, when, of course, it makes a difference to the way the UK works. And it is also akin to asking whether we breathe out before we breathe in, because it is clear that knowing the ordering is essential to our understanding of how lungs work. However, let me address the issue.
First, on horses, carts and sequencing, in any modern fiat currency system, whether that be in the UK, US, Japan and so on, the state's money has to exist before anyone can pay tax in it. You cannot, as a matter of simple logic, pay the government pounds that have not yet been created. That means that operationally the sequence is always:
- The government, via its central bank, creates money.
- It spends that money into the economy.
- Some of that money is then returned in tax; some is swapped into government bonds; and some stays in circulation as the money supply that keeps the economy revolving.
MMT's “spend and then tax and issue bonds” is not a slogan so much as a description of this operational reality. This ordering has to be right: nothing else is possible.
In contrast, the orthodox “tax and borrow, then spend” story is a political narrative that denies that reality to make it look as if the government is financially constrained in the same way that households are. It is a deliberately constructed falsehood set up to deceive.
Once you see the actual sequence, a lot of the usual myths about “running out of money” fall away. So no, it is not just a matter of designing a different harness: the cart really does move because the horse pulls and does not push from the other end.
Second, are we still “bound” by the need to tax and by real resources? Of course, we are, but in a different way from the conventional story.
The real binding constraint on government spending is always the availability of real resources: labour, skills, energy, materials, and ecological space. If you try to buy what is not there, you get inflation or shortages, however you tell the monetary story. This understanding is key. Modern money does not say:
- We can print money without limit, because that would be madness, and lead to inflation
- We do not need tax, because we most definitely do
- The state can grow without limit, because it cannot.
Those who say so do not understand modern money. What it does say is:
- We can always spend when there are resources available to be used, and inflation will not follow. We can have full employment, in other words.
- As Keynes put it, “we can afford whatever we can do”
- It would, then, be irresponsible not to do so. Why, for example, leave people unemployed when there is no reason to do so, or not care when we can?
- If there are things we want to do, but resources are not available, we can still do them, but only when we have used tax or regulation to free up resources for use in the desired way. The government is not neutral when it comes to achieving its objectives, using whatever is left over by markets: it can shape markets to limit their scope in meeting wants to ensure all needs are met as well.
In that case, tax then has three main jobs in an MMT framework:
- To create and maintain demand for the currency (you need pounds to settle your tax obligations).
- To withdraw spending power from parts of the private sector when their demand would otherwise clash with public purposes and push up prices.
- To shape the distribution of income and wealth so that the economy is both more equal and more stable.
So yes, you “need” tax in the sense that if you never taxed, you would eventually blow through the real-resource constraint. But you do not need tax in order to “get the money” to spend. You need it to create the space in which that spending can take place without generating unacceptable inflation and to manage distributional outcomes. That is a very different policy frame.
Third, has anyone ever “set the tax regime just right”? No, of course they have not, but that is true of any macroeconomic regime. No Chancellor, operating under the old “tax – borrow – spend” fairy tale, has ever set tax or spending “just right” either. Governments grope, adjust, and learn, usually too slowly, and often badly.
The point of MMT is not to offer a magic formula that suddenly makes that calibration perfect. It is:
- Descriptive, meaning that it is important to tell the truth about how the monetary system already works in a country with its own currency, central bank and floating exchange rate. Knowing the truth usually works better than building policy on the basis of fiction.
- Normative, meaning that once we admit that truth, we can stop pretending that “there is no money” for things we can clearly resource, and we can instead organise tax, spending, interest rates, regulation and planning around the real constraints I have already noted
In that sense, much of what MMT describes already happens: the UK government already creates money when it spends and destroys it when it taxes. To some extent, QE made that apparent. What we have not done is align our fiscal rules and political narratives with that reality.
Fourth, what about the Soviet Union and China? They are interesting mainly as examples of something else.
- The early Soviet Union relied heavily on physical planning and rationing. Money existed, but prices and taxes often played a secondary role to direct allocation of resources. The state still created the roubles, of course, but the main weaknesses were political and informational: lack of democracy, poor feedback, misallocation, and repression and not issues around “money creation” as such.
- China today runs a hybrid system. There is significant state direction of credit through largely state-owned banks, plus extensive use of markets. The state can and does create money, but again the key questions are about who controls real resources, how power is exercised, and how the ecological and social constraints are managed.
Neither system is an “MMT regime” in any meaningful sense. MMT is not a blueprint for central planning. It is a lens for understanding monetary operations in any system using state money. What those states then choose to do with that capacity, whether they be a democratic welfare state, or a system of authoritarian nationalism, or anything in between, is a political choice, and not something determined or even influenced by MMT.
So my short answer to my correspondent's underlying question would be:
- No, “create – spend – tax” is not just the same thing as “tax – borrow – spend” in a different harness. The sequencing is different, and once you acknowledge that, the politics that follow are also different.
- Yes, we are bound by resources, and we need tax, but for managing inflation, power and distribution, not to find money in the first place.
- And no, there is no historical nirvana where anyone “got it exactly right”. There is only the choice between telling the truth about how the system works and governing accordingly, or carrying on with fairy tales that conveniently justify austerity for some and indulgence for others.
Comments
When commenting, please take note of this blog's comment policy, which is available here. Contravening this policy will result in comments being deleted before or after initial publication at the editor's sole discretion and without explanation being required or offered.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
You become a Lawyer??
We can always spend when there are resources available to be sued
They joys of spell check!
This was writen on an iPad over a hotel breakfast. The spellcheker is not great on an iPad. Now back in my room on a MacBook – and spelling has been corrected, I hope.
“They” joys of spell check? Pots and kettle black! 😉
A Labour MP “explains” the “debt” with biscuits…
https://www.theguardian.com/politics/2025/dec/05/labour-mp-gordon-mckee-video-explaining-uk-debt-biscuits-33m-views
My question is:
“Who BAKED the biscuits?”
🙂
Sorry Labour Party trade secret!
All very interesting and pertinent.
One thing I have realised is the accuracy of that old saying from a German general, often pulled out in discussions about strategy: ‘No plan survives first contact with the enemy’.
MMT – all I want is to see it tried – a commitment made. I don’t expect it to solve everything over night and also explain the meaning of life or the number 42.
But also that commitment has to be accompanied by wider legal and other structural reforms to give MMT a chance. For example, we cannot use MMT without looking at laws that put investors first; capital controls; bringing capital to heel so that it stops helping itself; political corruption, sanctioned by superior courts; the politics of care also has to come to the fore in the people who man the state.
In other words, a programme of state ‘re-sovereign-isation’ has to take place in the name of democracy let alone MMT, to give MMT a chance. This is what worries me. It is markets that need rolling back now – not the state.
“MMT – all I want is to see it tried”
Well it is really tried when push comes to shove but the problem is hardly anybody acknowledges that it is they’re all too busy being Libertarians and telling each other government is the problem! When there’s trouble, however, they all come running home to daddy or mummy!
Its as if we discovered in 1931 (when UK came off the gold standard), that water ran downhill, but for the last 94 years we still moved water around in tankers, and sewage in night soil carts, because Bazalgette wasn’t allowed (by the powerful night soil carting businesses) to build sewers, and water companies were in hock to the water tanker operators so wouldn’t build a water grid.
So the stink, the cholera and the thirst and the filth got worse. The WFD-PTF (Water Flows Downhill-PipingThe Future) mavericks were accused of dangerous populism on water podcasts, and the spectacle of the nation running out of water held over the thirsty nation to prevent progress. The whole WFD thing was denounced as a populist pipe dream (think about it…) but as no one knew what pipes were, that smear didnt work.
Waterfalls were fenced off by the military in case they gave anyone ideas watching all that hydropower down over cliff edges.
Are you listening Rory and Alistair? Yes, I’m talking about YOU.
Very good.
Oh, PSR. How disappointing.
“MMT – all I want is to see it tried – a commitment made.”
Did you really write that after having read Richard’s opener?
Perhaps it could have been better to suggest,
“MMT – all I want is to see is *its possibilities* tried – a commitment made.”
The Guardian badly needs to be euthanised for publishing this rubbish:-
https://www.theguardian.com/politics/2025/dec/05/labour-mp-gordon-mckee-video-explaining-uk-debt-biscuits-33m-views
Just more of the tacit/unthinking assumption the country’s money only grows on the rich!
It is so stupid
Rory Stewart loved it. Says it all really.
They badly need an MMT expert on the rest is politics to explain things to them. I’ve just watched the latest episode with Rory revealing he’s spent 4 hours studying MMT and it’s basically all technical mumbo jumbo!
I would happily go on.
Let’s see now. Light the blue touch paper. Stand well back.
https://www.theguardian.com/politics/2025/dec/05/labour-mp-gordon-mckee-video-explaining-uk-debt-biscuits-33m-views
A simple question for MMT unbelievers
When a bank loan goes bad, who “printed” the money that the bank loses?
The bank “printed” the money for the loan out of thin air.
The repayments have three components:
1) Cancellation. Removal of the “thin air” money that the bank “printed”.
2) Interest. This is paid with money that the Government “printed” and invested in the economy. At least in theory, it should go straight back into the economy.
3) Insurance. Part of the repayment is an insurance premium to cover the cost to the bank of loans that go bad. The poorer you are, the higher the premium. This again must be paid with Government-printed money.
Supplementary question. Does the Government need to “print” the money used to cover the cost of bad bank loans before it can invest in the economy?
Sorry, Micheal but you are wrong re interest.
This is paid using bank created money that reduces other incomes and diverts it to rentiers, hence the description of it as extractive.
Asked AI
Q. Where does the interest on bank loans come from ?
A. The interest on bank loans ultimately comes from the aggregate spending flows in the economy, which are sustained and topped up by government deficits, allowing the monetary circuit to function without inevitable systemic collapse into debt deflation.
The MMT lens shifts the focus from a “fixed pool of savings” to a dynamic, hierarchical system of money creation and circulation where the state’s fiscal position is integral to enabling private debt to be serviced.
*
The original question shows that it is helpful to begin with an appropriate mental model. Starting with a ‘balance of forces’ mental model it is perfectly reasonable to propose that pushing and pulling a cart are exactly equivalent. Beginning with a ‘balance of flows’ mental model, it would be clear that one cannot begin to drain a tank until it has been at least partially filled.
I really like this analogy. You’ve put into words something that I now realise I’ve been intuiting as my mental model for cash-flow through the economy.
Now that I type it out, it’s also obvious. We don’t talk about cash-force. Although I could see this being a useful phrase to describe rich party donors effecting policy
The frustrating and not a little bit annoying irony is that all those screaming ‘small state’ and ‘markets’ would, if they got their way, still need the state to create the money to channel to their private enterprise. The naive ignorance of this is gobsmacking.
This is a central point of Christine Desan that the state developed market capitalism with its ability to create money from nothing. Businesses need debt-free money to make a profit they won’t get this from private banks’ creation of money with debt (has to be repaid with interest).
Just had a Conservative party newspaper through the door.
We are the only party with a plan to get our economy back on track. And it starts with fiscal responsibility because we have to get the deficit down. We announce a new Golden Rule. ( Ian deletes expletive ) For every pound saved, at least half will go to cutting the deficit.’ Elsewhere Mel Stride talks about cutting the DEBT.
It lists tax cuts -stamp duty, family farm tax, pubs and high street shops. Then tells us they will save £47 billion a year cutting benefits, and what remains of the aid budget, sacking c. 135,000 civil servants and Miliband’s vanity projects (climate change measures).
The £47 billion spending is income for someone else (and a third comes back as tax ) and so that reduces national income by about 2% of GDP.
If they then give c£25 billion to tax payers then in theory that could make up some of the reduction but much of that could saved and taken out of circulation.
BUT what is not clear how they could ‘pay down debt’. If they borrow less , there will be less interest on what they would have borrowed. Repeat that over few years and repayments will fall but enough to make up the loss in spending? It can only work long term surely? If they demand to redeem bonds that will be expensive as they won’t be rolled over by the sale of new ones. And they will be seen to be cutting benefits to pay rich people money.
I get the impression someone has written a wish list. Despite years of reading this blog I count myself an amateur so maybe I am being uncharitable?
Cutting £47bn means:
– Destroying disability benefits
– Freezing many benefits, including pensions
– Cutting UC
– Probably reducing benefits
Cuts on that scale would make life for many impossible.
Of course. Balancing the books on the backs of the poor.
It is immoral as well as economically illiterate.
Will you do a video taking the Tory plan apart-at some point?
Maybe. But no one is interested in them.
Richard, I agree with you completely that Bank lending is extractive, but I don’t see why you think interest is bank-printed money. The Bank prints the money to make the loan. When the loan is successfully repaid the bank gets back more £s than it printed. Where did the extra £s come from? Surely they must be Government-printed £s and that is why Bank lending is extractive?
Out of income.
The loan creates economic activity that generates income, and some of that is diverted to pay interest. Why is that so hard to understand?
I have been thinking about the “Debt”
Logically the Debt is money that has not been spent and taxed.
This means the “Debt” is savings such as savings in your bank account or your pension pot, of course the majority must be the saving of the rich who would never allow their savings to be taxed.
Do you really want the Debt to be reduced?
I will admit I find it difficult to explain to people. I tell them the Government does not need to tax them to spend but creates the money by spending and then has to tax it back out of the economy. They then say “so if the Government increases it’s spending it will then have to increase taxation at some point in the future, what’s the difference?” I say “well yes.. if the Government spends say an extra £70Bn they will at some point have to get a large portion to that back through taxation BUT they don’t have to raise an average of a extra £1000 per person from whatever money people already have in their bank accounts ‘before’ spending it and ‘after’ spending it there is another £70Bn sloshing around in the economy available to be taxed. Whatever the Government spent it on will be income for some workers, which they wouldn’t have had, they will pay income tax on it and tax on their spending which will then become someone else’s income and so on. It is quite possible there will be some individuals who may pay more tax than they would of done as some of that money passes through their hands but assuming the Government spent it on something of benefit to the Country like say NHS or transport they will have had the benefit of those improved services”
I hope I’m understanding it correctly.
You seem to be getting it to me.